Sentiment is overwhelmingly bearish. But the E-mini S&P 500 futures chart is surprisingly neutral on multiple time frames -- daily, weekly, and even monthly. Even our trusty six-hour chart offers only slight directional bias.
Despite all the noise in price action, the S&P 500 futures have generally migrated back to 3900, after breaks above or below. This brand of unruly range trading tends to open the door to an unusually large move once a final direction is chosen.
In the coming weeks, we'd assign a 50/50 probability of either a sharp rally or a sharp selloff, if that 3880 to 3850 area on the S&P is broken. Nevertheless, given the uncanny tendency for significant bottoms to occur in the month of March (think 2008 and 2020), along with a pattern of selling between mid-February and mid-March in recent years, we lean toward the premise that the relatively likely short-term pain will pave the way for long-term gain. That said, as we advance, bull markets will not be of the 2020 or 2021 variety; they will likely be slower, tamer, and more in tune with proper valuations. After all, investors are no longer starved for yield and feeling forced to plug their noses to put investment dollars into the equity market; they have choices now.
Even so, evidence suggests investors are holding substantial cash on the sidelines that will eventually make its way into assets. We believe this could trigger an "everything" rally in which stocks, bonds, and even many commodities, go up together. Deciphering when and where this repositioning rally occurs is challenging, but knowing it is an eventuality can be helpful. Here are a few factors supporting our overall bullish premise, despite the risk of a short-term fallout.
M2 Money Supply
M1 money supply is the cumulative total of all liquid assets in the U.S. economy, such as cash, checkable deposits, and traveler's checks. The M2 money supply includes M1 plus savings and time deposits (CDs and Money Market Funds). We can all agree that the economic and price boom that occurred on the heels of the pandemic was made possible by a dramatic increase in money supply due to government and Federal Reserve stimulus. Likewise, the recent softening of asset prices and sluggish economic growth is a side effect of policies aimed at removing the punch bowl, or in other words, mitigating the M2 money supply. However, according to the St. Louis Fed website, the M2 money supply has only slightly tapered from its highs. Although the data is a few months behind, it is fair to say the current environment is still relatively accommodative despite efforts made otherwise.
U.S. Dollar Weakness
The U.S. dollar index has been in freefall since topping out near 114.00 in September. Despite the fast selling, we have yet to give back the enormous 2022 rally made possible by the Russian invasion of Ukraine (flight to quality buying) and the government's response to inflation (interest rate differential buying). The weekly dollar index chart suggests the trend remains lower as long as the 106.00 pivot price continues to reject rallies. We are looking for the dollar to retreat to 97.00, a complete wipeout of last year's gains. Just as the dollar kept the pressure on assets of all types on the way up, a weaker dollar will support most assets as it continues its decline.
Monthly E-mini S&P 500 Chart
The monthly chart points toward resistance near 4000 and support just under 3700 with some risk of a retest of 3500. To be fair, a retest of the October 2022 lows could mean somewhere in the 3400 handle as liquidation runs rampant and tends to overshoot. In any case, the 3500 area is a significant pivot between the bull and bear market. We expect 3500 to hold if the market is given the opportunity.
On the flip side, a weekly close above 4000 suggests a more sustainable grind higher, but again, we wouldn't expect the same type of speculative frenzy seen during the wealth effect rally. The bulls should be happy with prices in the mid-to-low-4000s, not the January 2022 highs near 4800. The 2020 and 2021 rallies pulled forward years' worth of gains; we'll have to work off some time for reality to catch up.